Question:

What are discount points?

Answer:

Discount points are cash paid to the lender with the purpose of getting a lower rate. The decision whether to pay discount points greatly depends on the type of borrower and how much you intend to stay in the house. Investors and borrowers used to refinancing and changing house every several years usually don't need to buy points. However, whether you should buy discount points or not becomes clear after running calculations for the break even.

How much interest do I buy down with 1 discount point?

One discount point is equal to 1% of the loan amount. Paying 1% of the mortgage amount in cash at closing does reduce your loan rate with 0.125%. That is, on a loan of $200,000 at 7.25% if you decide to bring the rate down to 7%, you need to buy 2 discount points, which results in paying $4000 to the lender upfront.

Are discount points tax deductible?

Discount points are fully tax deductible for the year a purchase loan for primary residence was obtained. IRS rules on discount points tax deduction are different for refinances and other types of real estate property.

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